Tuesday, December 29

The philosophy of money

Australian Aboriginals lacked an independent currency, but like other indigenous groups traded ceremonial artifacts, grinding stones, sea shells, ochre’s, shields, axe heads, spears and even ‘water rights’ along their trade routes marked by permanent waterways. Trade was a ‘United Nations’ of affinity to the land where scarce resources in one region were exchanged for another’s as one Australian nation shared nature’s bounty. The tribes all spoke different dialects and relied on carved symbolic message on a message stick accompanied by translators to negotiate trade agreements. Their existence as the longest uninterrupted culture for 60,000 years or more bears testament to their idea that the land owns us rather than we own the land-the only real wealth upon which we all depend.

Elsewhere in the globe as an independent currency money was created philosophers debated its merits and use. The philosopher Aristotle (340 BC) asserted money was best understood as a duality; to procure necessary goods or services of which he approved and as an accumulated corruptible means to obtain one’s fortune. His extreme view proved a reliable sage as money has bedevilled humanity in whatever form was adopted be it capitalism, socialism, communism or a mixture as is evident in modern day China.

It was the era of modernism around 1500 that heralded inventive trade to follow the advancements in science. The puritan work ethic from the Reformation cast money in a more favorable light to coincide with the idea hard work was virtuous. Oliver Cromwell subsequently enacted laws to bolster the 'mercantilist' system to give preference to the British enterprise and shipping companies. Although historically we have many monetary empires dating back to the fall of the Roman Empire none rivaled the Industrial Revolution in England from 1740- 1780, - a logical melting pot given the recently discovered Newtonian mechanistic world - as suggested by John Gribbin in ‘Science a History 1543- 2001’

The industrial revolution became the catalyst for western world industrialization, but was a two edged sword in terms of benefits. Whilst inventiveness, division of labor and productivity supported vastly improved living standards capable of supporting a much bigger population it was at the expense of massive exploitation of people and land- to become the genesis of our current ecological disaster. During the Victorian era philosopher and moral ethicist Adam Smith published in 1776 his influential classical economic work entitled ‘Wealth of Nations’ to criticize the 'mercantilist' system. Smith articulated the view that money as the invisible hand of free markets will produce a satisfactory price return for land, labor and capital because the self interest in any free market benefits the whole of society as competition keeps prices low. Smith was aware any concentration in power would distort a free market and pointed out Merchants wielded monopolistic power afforded them as a consequence of bans on foreign competition. Mercantilism was also associated with a monetary system which used exported bullion to pay for imports- mainly from Asia- which reduced money supply to exert downward pressure on prices and economic activity at the expense of impoverished workers.

Mercantilism also adversely affected the colonies which were forced to use English ships, pay duties and only trade in commodities whose prices were set by the British Empire to effectively create an underclass of colonial citizens - a significant factor that led to world war and eventual American independence. The classical economics of Smith overturned the mercantilist system and his free market ideas remained popular up until the great depression of the 1930’s.

But the period afterwards saw the inevitable boom and bust cycles continue in tandem with the growth of the larger financial institutions such as banks whose occasional lending sprees exceeded loanable funds beyond the level of maintainable voluntary savings to cause social dislocations.

During the depression years in the 1930’s, John Maynard Keynes was to present a new radically different system to offer hope we could avoid recurrences of the painful boom bust trade cycles that had come to haunt modern day societies and brought upon an unsuspecting pre boom population the horror of the great depression. His theory was we cannot rely on markets to automatically adjust to ensure full employment so long as workers remained flexible in their demands. Rather his theory saw an active role for government intervention with both fiscal (taxation and spending measures) and monetary policy (control over the level of interest rates) to ensure economic growth and stability. Banks were to be regulated but enjoy ‘Lender of last resort’ from a reserve to ensure confidence was maintained in the system.

Keynesians thought it was imperative for government action during severe economic cycles to introduce government spending, tax breaks and reductions in interest rates during recessions but to reverse the situation during highly expansionary times. In other words to increase those same levers during inflationary times. Following the outbreak of World War II Keynes's ideas were universally adopted throughout the western world with commensurate success so that by the time we reached the mid fifties all western capitalist nations mirrored his views to share in the relatively strong, stable economic fortunes of the immediate post war era.

Keynes's influence however began to wane from the 1970s, with the emergence of renowned economist Milton Friedman who was skeptical over the ability of governments to effectively regulate the economy with fiscal policy as suggested by Keynes, explaining that such measures were prone to be both costly and ineffective. Freidman relied on tight control of money to maintain price stability. His elegant theory was easily understood and very appealing at a time of high inflation but selectively seized upon by vested interests promoting a free market economy. Concurrent to that change in economic focus was a type of philosophical materialism which had taken firmer root to assert our wellbeing or happiness is only measurable in terms of money. This became linked to fundamentalist type religions who promised future wealth as if synonymous with salvation. Simply put -‘if it doesn’t make money it doesn’t matter’! A type of economic fundamentalism persuasively joined forces with branded religion to present a rather potent cocktail of political inspiration based upon a minimalist role for regulation, suggesting markets are sufficient as the sole arbitrator except for control over the money supply.

Economic fundamentalism gained traction from the power of entrenched interests under either party to be incorporated into decades of government policy reaching its zenith in more recent times. However the recent stimulatory moves made by Obama, Gordon Brown in England and Kevin Rudd in Australia may well have been taken directly from a Keynesian handbook which is likely to rekindle resurgence in renewed interest in his economics.

Conclusion

Any measures that might help avoid the sizeable crashes of 1987, 1997 and 2007- the latter coming perilously close to emulating a great depression, will, as would be anticipated represent the best of the old and new way of thinking. But ultimately you cannot legislate effectively morality but rather I think one can ensure a system is both transparent and fair. I think it would be fair to say the free market envisaged long before by Adam Smith bears little resemblance to the one now championed as free. The championed free market today in reality is so encumbered with a concentration in monetary power and sufficiently lacking in transparency to necessarily distort the beneficial outcomes envisaged by Smith.

Freidman’s ideas about the advantages of smaller government and reliance on monetary controls have been selectively seized upon to give credence to an economic fundamentalism. What we have witnessed has been a very loose monetary policy which made the cost of money (money being currency and easily liquefied bank deposits) very cheap and acted as a catalyst for the excessive leveraging of corporations whose failure precipitated a financial collapse of grand proportions. I agree with Economist Paul Krugman who suggests we will, going forward, increasingly revert to a Keynesian style of economics in preference to one grounded purely on monetarism.

That is not to say a need arises for a larger government sector or even for more legislation. In fact I think we are in danger of over-acting and imposing such increased regulatory controls with proposed increases in new capital ratios and stricter lending requirements as to risk curtailment of any recovery by inducing a reduction in liquidity just as stimulatory measures globally must be wound back.

What are needed in my view are more descriptive type provisions in tandem with improved regulation, coupled with transparency. Large financial institutions need to have their mainstay commercial business and consumer lending areas separated into different entities to those involved in derivatives and any proprietary trading.

Additionally markets all need to be afforded transparency so that any derivative trading – particularly in relation to Hedge Funds – can be determined for markets to be informed and not left in the dark as was past practice.

The type of philosophical materialism which led to the idea that the stock exchange represents preferred repositories of money making entities which require freedom from regulation in order for those entities to create the wealth necessary to sustain our economies was always a discredited theory. However to the extent those stocks do represent a sustainable linkage of goods or services that may indeed be true. But because of the remoteness and lack of transparency to many of the corporate inputs the actual outcomes are oft far removed from such a reality. Sucked into a vortex of a money making machine where investors in AAA rated securities (and those securities derivations )were so far removed from those who actually owned the properties,it was hard to grasp initially how such schemes were concocted in the first place. Any renegotiation after default was thwarted by intermediaries who had no interest in any renegotiation or were restrained through legalities. The lack of regulatory oversight and need for improved transparency needs no further elaboration on my part. Any system which trades purely on the expectation of another’s failure is doomed to eventual failure, since integrity never envisaged insurance was to benefit from another’s failure or that one could make a profit from insurance.

However on a more positive note all of the major companies I have studied here in Australia – and from what I understand applies globally – are making strenuous efforts to ensure their business is sustainable and reflects the latest in good governance. Most refer to the savings in carbon reductions per employee and even in relation to their stakeholders. There is realization the old ways are not appropriate and regardless of any inaction by the government, a global transformation is already in full swing. It is also refreshing to read that many of the big banks were dismissive of the overtures of their overseas counterparts when offered trade in collaterised debt securities. That rejection was based upon the unnatural dichotomy between the security holder and the layers of wrapping that preceded the security in the form of the property. Some Banks still like to know who their customers are and to personally evaluate the risk- if you’re unable to do that alarm bells need to go off.

I will close with a link to where I began with the Australian Aboriginals. Money really is only a means of exchange so that we- ideally like our indigenous peoples- share to the extent as is necessary and sustainable.

Similarly our evolution was more dependent upon survival through cooperation - not on survival of the fittest as evolution’s most misquoted quotes suggest- since the way forward so far as our evolution is concerned has always depended upon cooperative efforts.

Best wishes for 2010 – may it offer more hope than the previous decade!

6 comments:

money is a fascinating subject, lindsay. and you sum up the modern era quite nicely.the thing is, once an economic idea works, everybody jumps to that side of the ship (to use a metaphor). the boat lists to one side, and everyone runs to the other.

In the US, we lost the counter-cyclical nature of Keynesian economics a long time ago.The Left wants more social programs, and the Right wants more military spending-- and both are content to empty the public coffer.And then Geo. W Bush, the "big-government conservative."We don't really have an idea of scaling back, other than a vague and nebulous general agreement that things are likely better along those lines.Maybe the people will gain their heart again.I'm not going to hold my breath while I wait.

Sera-That is true but I'm afraid the big ship has had a permanent list weighted philosophically to one side for along time.

The tilt may be stabilized by rushing from one side to another to try and steer a more even course, but it won’t be effective unless the philosophical base is sustainable.

Mercutio- Yes- the future still looks very uncertain and I refer to the last minutes from the Fed “Some participants...noted the risk that improvements in the housing sector might be undercut next year as the Federal Reserve's purchases of (mortgage-backed securities) wind down, the homebuyer tax credits expire, and foreclosures and distress sales continue.”

Long term fiscal sustainability is undoubtedly an un -debated topic by either party except for vague generalisms along the lines as you have suggested.

About Me

I have worked in the roles as Company Secretary or Divisional financial executive with larger Australian based multinational companies before changing careers in favour of sales and marketing for the latter 12 years of business life.
My particular interests include corporate social responsibility, ethics and research into more sustainable business practices.
I am a fellow of CPA Australia and an Associate member of the Governance Institute of Australia which was previously called the Chartered Secretaries Australia. I am chairman of the Malawi Support group who are a small group of catholic parishioners who raise funds to support a sister parish in Malawi.